Inflation-Forecast Targeting for India: An Outline of the Analytical Framework
IMF Working Papers, February 13, 2017
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Bibliographic details
- Authors: Jaromir Benes, Kevin Clinton, Asish George, Joice John, Ondrej Kamenik, Douglas Laxton, Pratik Mitra, G.V. Nadhanael, Hou Wang, Fan Zhang
- Published: February 13, 2017
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781475578690.001
Objective and Context
- India formally adopted flexible inflation targeting (FIT) in June 2016 to place price stability, defined in terms of a target CPI inflation, as the primary objective of monetary policy.
- The paper draws on Indian macroeconomic developments since 2000 and the experience of other countries that adopted FIT to derive insights on:
- how credible policy with an emphasis on a strong nominal anchor can reduce the impact of supply shocks; and
- how credible policy can improve macroeconomic stability.
Analytical framework and model
- The paper describes an analytical framework using the core quarterly projection model (QPM) to illustrate key issues given the unique structural characteristics of India and the policy options under an FIT framework.
- Topics addressed in the modeling framework include:
- a number of monetary policy instrument
- central bank policy rate
- exchange rate
- forecasting models
- model calibration
- monetary policy models and monetary policy rules
- transmission mechanism
- output gap and output-inflation trade-off
- inflation process and inflation expectation dynamics
- food inflation and supply shocks
Simulations and key findings
- Simulations of the QPM are carried out to:
- illustrate the monetary policy responses under different types of uncertainty; and
- bring out the importance of gaining credibility for improving monetary policy efficacy.
- Core insights emphasized:
- Credible policy and a strong nominal anchor can reduce the impact of supply shocks.
- Gaining credibility improves the efficacy of monetary policy in stabilizing inflation and output.
Policy implications and recommendations
- Under FIT, monetary policy should:
- prioritize price stability defined by a target CPI inflation;
- use model-based projections (QPM) to guide responses to shocks and uncertainty;
- focus on building and sustaining credibility to enhance policy transmission and outcomes.
- Practical considerations for the Reserve Bank of India and policymakers include attention to:
- inflation glide path and inflation outcome monitoring;
- managing inflation expectation formation and avoiding inflation spiral dynamics;
- accounting for asset price inflation and financial sector implications when designing responses.
Publication and metadata
- Authors: Jaromir Benes, Kevin Clinton, Asish George, Joice John, Ondrej Kamenik, Douglas Laxton, Pratik Mitra, G.V. Nadhanael, Hou Wang, Fan Zhang
- Date: February 13, 2017
- Series: Working Paper No. 2017/032
- Volume: 2017
- Issue: 032
- Pages: 37
- DOI: https://doi.org/10.5089/9781475578690.001
- ISBN: 9781475578690
- Stock No: WPIEA2017032
- ISSN: 1018-5941
- Subjects: Central bank policy rate, Economic theory, Financial services, Inflation, Inflation targeting, Monetary policy, Output gap, Prices, Production, Supply shocks
- Keywords: a number of monetary policy instrument, asset price inflation, central bank, Central bank policy rate, exchange rate, food inflation, forecasting models, Global, Inflation, inflation condition, inflation episodes in India, inflation expectation, inflation glide path, inflation outcome, inflation process, inflation spiral, inflation targeting, interest rate, model calibration, monetary policy, monetary policy credibility, monetary policy models, monetary policy rules, monetary policy simulations, Output gap, output-inflation trade-off, Reserve Bank of India, Supply shocks, transmission mechanism, WP
IMF Working Papers — "Inflation-Forecast Targeting for India: An Outline of the Analytical Framework", Working Paper No. 2017/032, February 13, 2017